APRA raises banks' capital requirements

It's a fundamental oddity with the sharemarket that good news can be bad, while bad news can be good. What matters for share prices is not whether the news is empirically bad, but how it compares to the expectations that have already been factored in.

So it is today with the big banks, which have leapt following APRA's statement that it will expect them to maintain a common equity tier 1 ratio (CET1) of 10.5% from 2020. That's up from the current requirement of 9.0% and will force the banks to increase their base of capital – probably through asset sales and underwritten dividend reinvestment plans. That will dilute earnings per share by a few per cent over the next few years – although they will no doubt attempt to pull some of it back through higher interest rates on lending.

All this is bad news of course, but it's also in line with what the market was expecting. There was the possibility, though, that it could have been worse, and the removal of that is why the share prices of the big four banks have jumped 3–4% today.

ANZ, CBA, NAB and Westpac have all released announcements saying they're well placed to meet the new requirement before the stipulated date of 1 January, 2020 – and so they are. Respectively they had CET1 ratios of 10.1%, 9.6%, 10.1% and 10.0% at the end of March and withholding one dividend payment through an underwritten dividend reinvestment plan would boost those figures by more than half a percentage point.

For once, ANZ is the best placed and should get to the magic 10.5% with the help of various asset sales now underway. For the sake of comfort, though, you'd expect all four banks to shoot for closer to 11%. Worst placed is CBA, which could require as much as $5bn in new capital to reach this level – almost 10% of its current shareholders' equity and equivalent to almost a year's worth of dividend payments.

We'll hear more about their exact plans in due course, but with their share prices near the middle of our Hold range, we continue to recommend you HOLD.

Note: The Intelligent Investor Equity Income Portfolio own shares in Commonwealth Bank and Westpac. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.